What You Need to Know About the New PFP Standards

by
Clark M. Blackman II and Dirk Edwards

On July 1, 2014, the Statement on Standards in Personal Financial Planning Services (the statement) will be in effect for all AICPA members. Understanding if, when and how the statement applies in your practice is essential not only to meet practice standards, but also to ensure you are operating at the highest professional level when delivering financial planning services to your individual clients.

The foundation of the statement starts with the AICPA’s Code of Professional Conduct (AICPA Code) that all members are required to follow, and the reality that, as CPA trusted advisers providing personal financial planning (PFP) services, we have a fiduciary obligation to always act in our clients' best interest. The AICPA Code lays out a very high standard of behavior regarding competence, due care, disclosure and objectivity. The highest degree of professional behavior is expected and required at all times. For example, a conflict that impairs objectivity cannot be disclosed away; it is either avoided or the engagement is terminated. The statement expands on these basic principles and provides direction to the member for delivering personal financial planning (PFP) services in a way that is consistent with the AICPA Code.

The statement provides guidance in key areas fundamental to the delivery of financial planning services. It addresses communication, disclosures and documentation; the basics of planning the engagement; and developing recommendations, and working with and recommending other professionals. This accomplishes three things, although there are ancillary benefits as well. First, it ensures that the client receives the information he or she needs to make good decisions. Second, it ensures that the member is meeting the minimum standards of behavior expected of a trusted adviser. Lastly, it provides a clear path for members to implement and deliver the level of planning services that clients need today.

The statement applies to any member who meets the definition as providing PFP services to individuals and represents to the public or to clients that he or she is providing PFP services. PFP services are defined by the statement as, “the process of identifying personal financial goals and resources, designing financial strategies, and making personalized recommendations that, when implemented, assist the client in achieving these goals.” They include one or more of the following planning activities: cash flow; risk management and insurance; retirement; investment; estate, gift and wealth transfer; elder; charitable; education; or income tax.

Members who do not hold out as providing PFP services may still be subject to the statement if they would be required to register as an investment adviser or if they sell financial products to individual clients. For guidance on understanding when you are deemed to be providing investment advice such that registration as an investment adviser is required, reference The CPA’s Guide to Investment Advisory Business Models published by the AICPA.

It's also important to recognize that the statement applies whether services are delivered verbally or in writing. Note also that, under the statement, implementation of the recommendations or monitoring of the client's progress or updating the engagement are separate engagements. You would not have an obligation for implementation, monitoring or updating services unless you have an agreement with the client specifically to do so. If you do provide these services, there is additional direction provided by the statement.

If the statement applies, to what areas must you pay special attention? You must always comply with relevant ethical requirements. Specifically, you must possess a level of knowledge of PFP principles and theory and have a level of skill in the application of such principles that will enable you to identify client goals and objectives, gather and analyze relevant information, consider and apply appropriate planning approaches and methods, and use professional judgment when developing financial recommendations.

In addition, you should evaluate whether any conflicts of interest exist with regard to the engagement. If a conflict exists, you must determine whether the engagement can be performed objectively. If you determine the engagement can be performed objectively, you should disclose all known conflicts of interest and obtain consent as required under Interpretation No. 102-2, “Conflicts of Interest,” under Rule 102, Integrity and Objectivity (AICPA, Professional Standards, ET sec. 102). If you determine that the engagement cannot be performed objectively, the engagement should be terminated.

Prior to beginning, and throughout the engagement as circumstances dictate, you need to disclose, in writing, all compensation you and your firm (or affiliates) will receive for services rendered or products sold. If compensation alternatives are offered, you must disclose the differences in these alternatives in writing.

Documentation and communication to the client regarding the scope and nature of services to be provided is essential. You should continually evaluate the appropriateness of the original engagement as the engagement proceeds, and document and communicate any changes to the client.

If you are aware of a service needed to complete the engagement and do not, or will not, provide that service, you should limit the scope of the engagement accordingly and recommend that the client engage another service provider for that service in writing.

When obtaining and analyzing relevant information necessary to develop recommendations based on the stated engagement objectives, your professional judgment, due care and prudence will dictate what steps are required. If you are unable to collect sufficient relevant information to establish a reasonable basis for recommendations, the engagement scope may be restricted to those matters for which sufficient information is available. This scope limitation should be communicated to the client in writing, including that this limitation should be taken into account in the assessment of conclusions and recommendations developed.

If sufficient information does not exist to proceed as agreed, you should terminate or modify the engagement through mutual agreement with the client. This engagement modification or termination should be communicated in writing. When analyzing information obtained while performing the engagement, the member should evaluate the reasonableness of estimates and assumptions that are significant to the plan, use assumptions that are appropriate and consistent with each other, and consider the interrelationship of various PFP activities. You should always establish a reasonable basis for PFP recommendations. Your recommendations should be derived from analyses of relevant information, client goals and the client’s overall financial circumstances. Even when an engagement addresses a limited number of personal financial goals, you should consider the client’s overall known financial circumstances.

The nature and extent of analyses and other procedures performed when establishing a basis for recommendations are affected by the scope and objectives of the engagement, and should be documented. You should communicate to the client the assumptions and estimates that are significant to the recommendations. This should be documented and include, at a minimum, a summary of the client’s goals, significant assumptions, estimates, recommendations and a description of any limitations on the work performed. The recommendations in the engagement should contain qualifications to the recommendations if the effects of certain planning areas on the client’s overall financial picture were not considered.

When referring a client to another service provider, you should consider the professional qualifications of the other service provider. You should disclose, in writing, any compensation received for making such referrals and communicate, in writing, the extent to which you will or will not evaluate the work performed by the service provider. If you use the advice of another service provider when carrying out the PFP engagement, you should thoroughly understand the impact of the service provider’s advice. If you have evaluated the advice of the other service provider, and if you concur with the other service provider’s advice, you need not communicate this concurrence to the client because concurrence is implied by its use. However, if you do not concur with the other service provider’s advice, you should communicate this non-concurrence to the client in writing.

Although not addressed in this article, additional direction is also provided in the statement regarding implementation, monitoring and updating of financial advice. Needless to say, a complete reading of the statement is essential to having a thorough understanding of the new standards.

PFP Standards’ Compliance ToolkitWe believe the statement will have a very positive impact on the public, the profession and the CPA financial planner. We encourage you to read the statement and use the Standards in PFP Services: Compliance Toolkit, which includes sample engagement letters, checklists, frequently asked questions and much more to assist you in understanding and applying the statement.

Clark M. Blackman II, CPA/PFS, CFA, CIMA, CFP®, AIF®, is founder of Alpha Wealth Strategies in Houston, Texas. He is the immediate past chair of the PFP Executive Committee and is the immediate past chair of the Responsibilities in Personal Financial Planning Services Task Force. Clark was the recipient of the 2012 AICPA PFP Distinguished Service Award.

Dirk Edwards, CPA/PFS, JD, MBA, heads up Edwards Consulting, LLC, in Lake Oswego, Oregon. In addition to serving as past chair of the PFP Executive Committee, he is also chair of the Responsibilities in Personal Financial Planning Services Task Force. Dirk was the recipient of the 1991 AICPA PFP Distinguished Service Award.